How Safe Are Your Bank Deposits?

With news coming out last week that the Federal Deposit Insurance Corp. might approach banks to borrow cash to fatten up depleted accounts, consumers may well wonder “is my bank money safe?”

Let’s break out the magnifying glass and take a look.

The U.S. government and the banking industry have a lot riding on the FDIC’s health and safety. Bank failures are a fact of life on Main Street these days, and both Uncle Sam and financial institutions need the FDIC to shore up weaker banks and find stronger ones to take them over. In a nutshell, that’s the FDIC’s primary mission – to apply a salve to customers at failed banks until the doctor shows up.

But even the best doctors can crack under the burden of treating too many patients. So it goes with the FDIC. It’s burden right now is an expected $100 billion price tag to cover failed banks through 2012, according to the FDIC’s own calculations. An earlier study estimated that number to be closer to $70 billion, suggesting that things are growing worse in the banking sector.

That’s why last month the FDIC voted to have banks “pre-pay” some $45 billion in insurance premiums – premiums that technically weren’t due until 2010 through 2012. Make no mistake, the money was needed – the FDIC fund was down to $10.4 billion in June. That’s a pittance when the agency’s mission is to cover $4.8 trillion in U.S. bank deposits.

But the ripple effect is still with us. Besides taking $45 billion out of the already tight lending market, the move also opened some eyes in bank regulatory circles. After all, the FDIC is breaking new ground with the $45 billion cash injection. Never before has the agency required banks to prepay insurance premiums.

Besides breaking with precedent, the fear is that the FDIC won’t be able to cover all of its obligations, especially given the rising number of failed banks – 98 so far in 2009 alone. That’s already cost the agency more than $25 billion, according to FDIC statistics. Plus, the amount of individual deposit coverage was hiked to $250,000 from $100,000 in October 2008 – partly because consumers were losing faith in banks. To reassure depositors is a commendable priority, but it also raises the obligations an already overburdened FDIC has undertaken in the name of financial security.

Given these mounting challenges to the FDIC, should depositors be nervous? No question, the FDIC is sailing somewhat unsteadily into uncharted waters. Even so, they have a reassuring escort in the federal government. It’s hard to envision a scenario where Uncle Sam wouldn’t hand the FDIC a big bailout (and by extension U.S. bank depositors) if it ran out of money.

One exception would be a costly, prolonged war with Iran. Another would be a major selloff of U.S. binds by major global lenders like China and India. In those instances, especially if they happen simultaneously, there likely aren’t enough printing presses in America to bail out the FDIC.

Admittedly, that’s a highly unlikely scenario. But so was the notion that the FDIC would “borrow” $45 billion from banks to ensure its solvency.